Canada's Smaller Banks Request Higher Deposit Insurance In Wake of Banking Crisis

© Reuters

By Ketki Saxena 

Investing.com – In the wake of the financial crisis that has rocked regional banks, and spelled the end of Credit Suisse (SIX:CSGN), a coalition of Canada’s small banks is urging the Federal Government to increase the limits on deposit insurance. 

Currently, Canada’s insurance program protects depositors up to $100,000 (US$73,200) per account. This is a substantially lower figure than the $250,000 cap on accounts typically  covered by the US Federal Deposit Insurance Corp. 

The Banks & Trust Companies Association, which represents small and medium-sized financial institutions in Canada, outlined their point of view in a letter to Canadian Deputy Prime Minister and Finance Minister Chrystia Freeland. 

“Increased protection limits would send Canadians a strong signal about the stability of the financial system while greatly reducing any concern about the damage a ‘run on the bank’ could have on an institution and its depositors”, the letter noted. 

The coalition also noted that the higher deposit limit would be beneficial to business owners requiring a float of over $100,000, which the banks believes would create more choice in the market. 

“Competition in financial services is an important issue and increasing CDIC deposit protection limits would help achieve that”, the letter noted. 

The group has been lobbying for deposit insurance reform since long before the collapse of Silicon Valley Bank, which kickstarted the crisis. 

However, the banking crisis has certainly served as a catalyst. In the US,  officials are now exploring a temporary expansion of FDIC coverage to all deposits, a measure designed to shore up confidence in the sector.

So far, the Canadian banking system, which  operates under a different regulatory structure than the US, has proved to be relatively stable.

Analysts at ING note, “Canadian banks are looking relatively resilient right now, but they too are likely to become increasingly wary given the fallout from what has happened. We should expect to see some modest tightening of lending standards which means access to credit will become more restricted throughout the economy.”

This is also a view reiterated by Andrew Moor, Chief Executive Officer of Equitable Bank and one of the key members of the coalition.

Moor notes that the Canadian financial system “looks really solid in this environment”, remaining protected from the issues now afflicting U.S. regional banks. However, he argues that increasing the deposit limit would improve confidence and stability in the Canadian banking system. 

The coalition has asked that Finance Minister Chrystia Freeland announce a review of the deposit insurance limit in the March 28 budget.